Some landlords are being asked by their banks to take action, including potentially selling properties, to pay down their debts due to rising interest rates.
Mortgage adviser Glen McLeod said he was working with a client in that situation at present.
When an investor had six or more properties in their portfolio, they were usually dealt with as commercial clients by a bank, rather than standard residential borrowers.
That would mean that every couple of years the bank would check to see whether the lending was still acceptable.
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Usually, banks required investors to receive income that was at least one-and-a-half or twice the value of the interest being charged on the loan each year.
“When interest rates were low they would have been stress-tested at a higher rate, however now that the interest rates are high the stress rates will be even higher and the reality is that it would be extremely hard to meet the criteria,” he said.
McLeod said investors were told to move to more expensive principal-and-interest payments instead.
“The alternative is to sell down some property to get the portfolio back under the threshold. Neither of these options are generally palatable to the investor. Selling at the bottom of the market or impinging cashflow. Short of being able to increase the rents enough to cover the investor finds themselves between a rock and a hard place.”
McLeod said it was difficult to fix because rent costs had not risen at the same pace as interest rates.
Other investors were being told to pay down their debt when they sold a property rather than banking the profits.
Loan Market adviser Bruce Patten said it had become relatively common in recent years.
“What people don’t realise is that they need to advise the bank they have sold and what their preference is for debt repayment – for example to pay some but also hold some of the sale proceeds. Often the bank doesn’t find out until the lawyer requests the mortgage discharge and often that is only a week before settlement.”
He said, with all the recent rule changes, whenever a client sold a property the bank had to reassess their ability to continue to repay their remaining debt.
“An example is that if someone sells their rental for say $1 million, but only owe $500,000 on it, and have other debt of say $600,000, if they don’t do an application the bank will take the full $1m sale proceeds and repay what’s outstanding.”
He said the banks needed to take some responsibility, too.
“Often they sit on the discharge request until a day or so before settlement then contact the client and tell them they will be taking the full sale proceeds unless the clients provides info to confirm they can afford the remaining debt.
Mortgage adviser Jeremy Andrews said most lenders now required an income and equity assessment when a property was sold, and the proportion of borrowers being told to repay other debt was increasing as the cost of living and interest rates rose. “Depending on how these stack up, the bank can potentially require full proceeds to be repaid from mortgages.”
New Zealand Bankers’ Association chief executive Roger Beaumont said lending policies and risk appetite would vary from bank to bank and could change over time.
“In applying those policies, banks will look at a borrower’s particular circumstances, including their debt levels, security, and ability to repay any loans.”